PNM Resources: Takeover Target?

We've uncovered one utility stock that is ripe for the picking;
importantly, we like the stock even without a takeover offer, says Roger
Conrad, utility sector expert and editor of Conrad's Utility
Investor.

PNM Resources (PNM)
is a potential target, trading at little more than book value, despite being on
track for solid growth.

Management is guiding toward full-year 2014 earnings per share of $1.42 to
$1.52, supporting the recently announced 12% dividend increase. The company also
affirmed it's on track to meet previous 2013 full-year guidance of $1.35 to
$1.41.

Utility capital spending growth underlies those projections. Texas customer
growth is expected to average roughly 1% to 2016, with New Mexico somewhat less.

But the company is also asking state regulators' permission to retire two
older coal-fired stations, recover $205 million in under-appreciated power plant
assets, and to bring its share of unit three of the Palo Verde nuclear power
plant into rate base.

Palo Verde is majority owned and operated by Arizona's Pinnacle
West (PNW),
itself a takeover target, though its larger size ($5.81 billion market
capitalization), will likely require a bigger buyer.

Operating performance has improved markedly over the past decade, with most
output sold into wholesale markets. Adding it to rate base would further
stabilize PNM's
earnings. So would approval to build a 177-megawatt gas peaker plant and 40 megawatts
of solar.

During the 2014 forecast conference call, Chairman, President, and CEO Pat
Vincent-Collawn stated she expects Arizona regulators to make their decision in
the case by early next autumn.

In the meantime, Palo Verde is fully hedged for 2014, eliminating risk to
volatile wholesale markets in the Southwest, so long as the transfer to
regulated rate base is successful.

PNM's
great task remains strengthening its balance sheet. But the volatile, unregulated
operations are gone. The company is set to refinance its 9.25% Notes of May 2015
with cash. And it expects to cover its $2.1 billion in planned five-year capital
spending without issuing stock.

Prospective suitors may wait until New Mexico regulators rule on Palo Verde,
and other capital spending issues are resolved.

But PNM
does meet the most important test for any takeover target: It can grow earnings,
boost dividends, and strengthen its balance sheet, even if no one ever makes an
offer. I rate the stock a buy up to 24.